What is a Good Credit Score?

Good Credit Score Definition

Nowadays, obtaining the best interest rates on a home loan, student loan, and car loan requires having a good credit score. In rare circumstances, having a bad credit score also may make you ineligible for certain occupations. We now base important financial decisions on credit score information, but most individuals do not understand what influences their credit score favorably or unfavorably.

This article will go over frequently asked questions about credit score in an effort to at least partially explain the credit scoring system’s mysteries.

Credit Score

Credit score is simply an analysis and ranking of your creditworthiness relative to the rest of the population based on a summary of your credit history. Fair Isaac and Company created a program that analyzes the numbers, known as a FICO score. The three credit reporting agencies (Experian, Equifax and TransUnion) utilize your FICO credit score to determine your creditworthiness and provide the information to the lenders.

The credit bureaus have a record of your credit history. They have full access to the history of every loan and credit card debt you have ever had, as well as every payment you’ve ever made. You may be sure that the credit bureaus are aware of anything financial if it includes your social security number. Your ranking is determined by the information put into the FICO software.

Though not the only score available, FICO credit score information is the most widely utilized and highly regarded by lenders.

Calculation of Credit Scores

Using an algorithm or mathematical model, credit scoring firms like FICO and credit reporting agencies generate credit scores based on the information in your credit reports. This kind of score is occasionally referred to as a “credit risk score” since it ostensibly forecasts the likelihood that the customer would miss a payment on a loan or other kind of credit in the future.

Due to the numerous distinct scoring models used by FICO, you actually have more than one FICO score. So, depending on the scoring model—such as FICO, FICO 8, FICO 9, or FICO 10T—used to calculate it and the credit reporting bureau that produced the underlying credit report, your score will probably change. For the auto, credit card, and mortgage industries, among others, FICO also provides variants of its scoring algorithms that are industry-specific.

Factors Affecting the Credit Scores

Although FICO withholds the precise formula it uses to determine credit scores, it does take into account the following elements:

• Your payment history (35%). If you have filed for bankruptcy, had an account sent to collections, or paid payments late, these things will lower your credit score. Your score decreases as the problem becomes more recent.
• Amounts owed (30%). Your credit score will likely suffer if you owe money that is almost at your credit limit. Additionally, having several accounts with credit card balances could harm your score because it will appear that you are overextended.
• Length of your credit history (15%). It’s better if your accounts have been active for a while.
• New credit (10%). Your score may suffer if you’ve opened a lot of new accounts recently.
• Credit mix (10%). A “healthy mix” of credit types, including both revolving and installment accounts, is what FICO claims it is searching for.

The percentages represent the estimated weights assigned to each component in calculating your credit score. As you can see, your payment history and the total amount you owe on all of your credit lines (loans, credit cards, etc.) account for 65% of your credit score and should therefore be the focus of your attention.

Keep up with your loan and credit card payments due to the fact that a late payment could result in the lender reporting you to a credit bureau (some of the lenders will wait until you miss two payments to report the delinquency). Your credit report contains negative credit history for around seven years. The most adverse factors include accounts that are sent to collection agencies, loans that you default on (or if you file for bankruptcy), and more current issues are given more weight than older ones. 

Banks prefer to see that you have a variety of credit. Lenders will often feel more secure if you have a balanced mix of loans and credit cards (school loans, mortgage loan). Of course, having too large of a loan balance will have a negative impact on your credit rating.

Good Credit Score Definition

The range of FICO scores is 300 to 900. Although the highest credit score is 900, most people are unlikely to reach it. The average credit score in the United States is 723, according to FICO. In other words, 50% of people have scores above 723, while the other 50% have scores below it. An outstanding score is higher than the mid-700s. Over 720 indicates that you are “very good.” Scores between 670 and 720 are considered “good,” and at 650 and lower, a declining trend with doubtful credit prospects begins. Though they are growing increasingly significant, credit scores aren’t the sole consideration when applying for credit, it should be highlighted.

You could previously acquire a moderate to low interest rate with a “good” score. To acquire the best interest rates, though, amid the current credit crunch, you’ll probably need to be consistently in the very good to excellent credit score range. If you do not have an excellent or very good score, you can still receive credit, but you’ll probably pay a higher interest rate.

Credit Check

You’re regrettably not entitled to a free credit score every year, unlike with your credit reports. But in some circumstances, such as when you apply for a residential mortgage, when the creditor charges you a higher interest rate, or when the state mandates that the creditor disclose your credit score, the creditor is required to give you the credit score that it used in the credit transaction or decision.

The regulations governing when lenders must disclose your score are intricate. Therefore, the best course of action is to request additional information whenever a creditor refuses to provide you credit, presents you with credit terms that are less favorable than those you requested (or believe you deserve), lowers your credit limit, or cancels your credit card.

Improve your Credit Score

As you can see, payment history and balances owed account for the majority of your credit score. Therefore, avoiding paying late and lowering your debt are the greatest approaches to raise your credit score.

Today, you can quickly stop missed payments by signing onto your credit card online and selecting the minimum payment option. On the day your payment is due, this option automatically deducts the minimum balance from your bank account (you will need to link the accounts). By registering with this free service, you guard yourself against those instances when you merely forget to pay your credit card bill. Additionally, since it’s only the minimum payment, you do not need to worry about your checking account getting deducted for a large sum each month.

Attempt to maintain your balances low, ideally 20% or less of your available credit, as was previously indicated. If that isn’t feasible, strive to pay more than the required minimum monthly payment. Making simply the minimal payments will usually take years to pay off the debt because they won’t even cover the finance charges and interest. 

By keeping credit card accounts open, you can raise your score in another way. When you shut an account, your available credit decreases and your debt-to-credit ratio rises. Make a minor purchase per month on any active credit cards and make sure to pay them off completely to avoid dormancy penalties or the lender closing your account without your permission. If you own two credit cards, for instance, use one of them once a month to buy gas and pay the full balance each month.

Additionally, obtain copies of your credit report on a regular basis to check for errors. It’s crucial to continue paying attention because if you make a mistake on your credit report, your FICO score will certainly suffer.

Paying For Your Credit Score

Your credit score is also available for purchase. The FICO website provides access to a copy of credit scores depending on your Equifax, Experian, or TransUnion file as well as up to 28 of the most popular FICO score variants, including mortgage, auto, and credit card versions. However, in order to obtain them, you might also need to pay for credit monitoring.

Credit scores are sold by other companies, including credit reporting bureaus, but it isn’t always worth the price because you could not get the scores that actual creditors use. Instead, companies occasionally provide VantageScores, which are used by fewer creditors, or ratings designed to help consumers understand their credit scores. 

You can’t be certain that the credit score you purchase will be the one any specific creditor will look at, even if the provider does supply your actual credit score. This is because creditors use various scores (and sometimes create their own). Additionally, if you buy your score from any of these companies, be wary of hidden costs for services like credit monitoring that could increase the cost.

Contact our trusted  Debt Defense Attorney Today

Consider speaking with our skilled Portland Debt Defense attorney if you want additional details and legal advice on raising your credit score or if you need assistance correcting your credit report.

At Northwest Debt Defense, our debt defense attorneys from Portland, Salem, and Medford, Oregon, as well as our Washington debt lawyers from Seattle, Tacoma, and Vancouver, assist clients in raising and keeping their good credit scores. So be sure to contact us straight away the next time you worry about having a bad credit score!

Schedule a free debt analysis with us today!